Reverse Mortgage Loan Blog

Q: I want to help my older parents so they can have a more stress-free and comfortable retirement, and believe I am in a position to do so. They have a home in an area where housing prices are actually still increasing, which makes the scenario even more attractive to my husband and me.

Their home is valued at about $250,000 and they have an interest-only mortgage with a balance of $115,000. I would like to give them a personally financed reverse mortgage of $115,000 to pay off this first mortgage. So I would give them $115,000 and set the interest rate at 6 percent.

The $115,000 grows for me like a long-term fixed-rate, compound-interest CD would grow, except I would get no payments of interest or principal until they sold the house or the house was sold because they passed away.

They would make no payments as long as they were living in the house and I could not get back my investment or interest until the house was sold.

Is this correct? For someone who has the funds to invest and is looking for a tax-deferred and safe investment, this sounds like a great opportunity (so long as they can live without the funds for potentially a long time – which I can).

As far as it being a great deal for the elderly parents, I can see no disadvantage to them – only benefit. Am I missing something?

A: Sounds like a good plan – for you and your parents. However, before you enter into this transaction, I suggest that you consult a tax professional so that you (and your parents) understand the tax consequences. An attorney should also prepare the promissory note and the reverse mortgage document.

When a person (or couple) reaches age 62 and is considering obtaining a reverse mortgage from a commercial lender, he generally is required to have a meeting with a consumer credit counselor so that he fully understands the pros and cons of such a reverse mortgage. I don’t think that would be necessary in your situation. However, it might make sense to have your parents retain their own attorney, so as to avoid any potential claim that you somehow took advantage of your elderly parents.

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Q: I have an older friend whose neighbor has approached her regarding doing a reverse mortgage. They want to acquire her property after her death or when she goes to an assisted living facility.

She has a niece and two nephews who will inherit her estate when she is gone. They are not in a position to do a “family” reverse mortgage.

My question is that my friend feels very comfortable with the honesty and integrity of the neighbor who suggested this, but is it a good idea? She said she would definitely go through a real estate lawyer to prepare the paperwork, etc. What is your opinion?

A: As you can see from my previous answer, I advised the parents to get an attorney even though their children were going to lend them the money on a reverse mortgage. In your friend’s situation, while she may trust the neighbor, she definitely needs to discuss the entire situation with her own lawyer.

If, for example, she would like to leave the house to her niece and nephews after she dies, that may not be possible under the reverse mortgage – or in the worst-case situation, the heirs may inherit a very large mortgage, which would have to be paid off to satisfy the neighbor’s loan. Keep in mind at all times that the neighbor wants the house.

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